The Unforgettable World of Stock Markets: The Moment the Game Stopped

A thin red line of morality

An interesting event happened this last week.

A group of young investors jumped on the back of hedge funds for a real fight. The GameStop company was the victim. But to properly understand it, I had to read and hear a lot of information. My goal was to understand the stock markets’ complex problems on short selling, short squeezes, or corners.

Some investors are demonizing the short-sellers, and I needed to understand why.

Short selling has been around for more than 150 years on Wall Street. And it is one of the reasons why Wall Street is the most developed market in the world.

Short selling has the particularity of keeping the markets alive, even in Bear Market, or downward trend of the market in general. It increases liquidity because, besides investors, traders also buy and sell. Both in bullish and bearish markets, money is earned. So, there is always plenty of liquidity.

Why is it good for the economy and the companies?

Let’s take Tesla’s example. The company had 16 years of losses, from its founding in 2003 to 2019. Only in 2020 did the company become profitable. If Tesla had been born in Europe, it would hardly have resisted the long process of innovation.

In the most efficient market globally, even struggling companies can finance themselves in the markets. As long as there is liquidity in shares. They often endure crises, resuming growth in the next economic expansion.

We Are Most Creative When Our Back Is Against the Wall

Sometimes unusual phenomena happen. Hedge funds excessively provoke the market with short positions. Some of them with percentages often 50% above the available shares.

How is it possible?

Through naked short selling, more shares are sold short than those sold by the company. Yet, short-sellers abuse this possibility, seeking to take companies’ quotations to the pond. Making it difficult to finance them at reasonable prices, even trying to ruin them.

Here is the moral factor that brought out the Redditors to make a corner.

The intention of these bulls was not to cause a short squeeze but a corner. This is like saying, corner the shorts in a dead-end and force them to take huge losses.

GameStop Novel

A group of Redditors called WallStreetBets saw a short position of 150% on GameStop. And encouraged group followers to buy shares with all their strength and speed. They forced short-sellers to cover their positions at much higher prices.

As the shorts were short with 150% of the shares, there are not enough shares to close those positions. So, the short-sellers are trapped in a corner, with no possible escape. Unless the company cooperates by issuing new shares to satisfy these shorts. Or the short-sellers get financing and shorten even more shares to bring GameStop down again.

Morality, Like Art, Means Drawing a Line Someplace

We should stop pretending that trading in stocks is investing in businesses.

Capital markets were initially conceived to finance the real economy and to help capitalize businesses and companies.

Unfortunately, it doesn’t happen anymore. At least the way it should be. It has become a synthetic casino — a gambling model with no morality.

I’m an investor and a believer in the free market. And as a European, I’m a real fan of the US stock market. I invested for the long run in companies like Tesla, Apple, Microsoft, Disney, AT&T, Square, and so many others.

Yet, from time to time, here comes another event that shows us how rotten the system is. It’s urgent to simplify processes, moralize them, and bring the market back to the people who produce, and to the people that bring wealth to the country.

Capital invested in real businesses has been taken away from some malicious hedge funds. That capital could drive growth and create real jobs, prosperity, and innovation.

Cboe Global Markets, Inc, a global exchange operator, reported that, in 2020, stocks were traded at a total volume of $121 trillion.

Yet, more than 95% of that volume didn’t even reach the real economy.

So, right now, we have a supposed equity market that should provide capital to the real economy. But at the bottom is being the most immoral casino bet in the world.

Hedge funds should be tools to support the real economy. Not to fill the belly of managers with juicy commissions. If they add nothing to the real economy, they should be excluded.

Yet, not every hedge funds are bad. Take, for example, Ray Dalio’s Bridgewater or Howard Mark’s Oaktree Capital. These two hedge funds are led by two investors that I deeply admire. I’ve read several books, both from Ray and Howard. I often read notes that I took from the lessons they gave me. And I often read newsletters from both.

They are good people. Philanthropists. Their hedge funds do not seem to have damaged the market or take advantage of to the detriment of the real economy.

The Reddit Novel

Robinwood brokerage has been in some extreme events lately. In May 2020, a group of Redditors from WallStreetBets started investing in an apparent dead stock at an exponential pace. Everybody wanted something about this company. From 2,000 investors on Hertz, it went up to 180,000 committed “fans.” Stock gambling at its best.

That was when I found a book I automatically bought from Jaime Rogozinski called “ WallStreetBets.” The subtitle made me very curious. “ How Boomers Made the World’s Biggest Casino for Millennials.”

Why did Robinwood investors were buying Hertz stocks if the company was filed for bankruptcy?

When millennials had the age of 20 years old, the 2008 mortgage crisis came. And it whipped out the savings of their parents, grand-parents, familiars, and friends.

These millennials not only watched the unbelievable capitalistic schemes in financial institutions. But they also suffered from the whole process.

And now, millennials are treating Wall Street for what it is- a gigantic casino for them to play. A legal venue was full of leveraged tools to make sophisticated bets with their cell phones.

Nowadays, WallStreetBets turned into a social media network where kids and youngsters bet on the YOLO culture. YOLO means You Only Live Once.

YOLO culture was the reason I finally understood what happens to Hertz investors.

Hertz investors were buying stocks of a dead company for fun!

From the time I read the book until today, these kids have refined themselves.

They became aware of the system’s immoralities and what hedge funds are doing to the market.

Now, highly sophisticated Redditors, highly leveraged, and highly financed nerds are attacking Mordor. They want to annihilate Sauron himself, the supreme image of evil in the famous saga The Lord of the Rings.

Ironically, millennials created platforms like Robinhood, and now they’re using them to provoke a war.

The future of trading and Wall Street, in general, should be enjoyable. The brokerage industry is changing at such a fast pace that between the completion of this book and when the editing process was finished, Charles Schwab acquired TDAmeritrade, Robinwood launched the ability to purchase fractional shares, and Vanguard- arguably the Holy Grail of safe investing- which is known for low commission index funds, is now offering stock options commission-free.- Jaime Rogozinski in “WallStreetBets: How Boomers Made the World’s Biggest Casino for Millennials.”

If Redditors are pushing hedge funds into a morality corner, I’ll want to see more of it.

Unfortunately, there’s a lot of misinformation, confusion, and little foresight. We are creating gigantic bogeymen, triggering a tsunami where the good and the bad are carried in the current.

Regulators have to look for these signals and control leverage levels. They must make the market more transparent so that we all know who is shortening what and in what amount.

Only then, the stock market will come out stronger and more moralized. Otherwise, it will be another day well spent in Las Vegas.

Final Thoughts

It’s always good when you see young investors show experienced ones that they are wrong.

I believe that the GameStop novel is one of those cases. A broken system in urgent need of renewal.

When there is too much money in the system, poorly distributed, less useful things happen.

Like in any other system, it has to be balanced.

Short selling is not a wrong tool if it’s used in a balanced way. But there have to be explicit rules to control it.

Short selling was the one tool that warned investors about Nikola. If short-sellers did not short sell the company, their CEO would continue to deceive everyone, even today.

In 2008, short-sellers bet heavily against big banks. It was from there that everyone realized what was happening behind the scenes.

Yet, some hedge funds lost their absolute morality. And these are the bad guys.

These guys are in the business to profit from destroying companies. It’s their business models. They ultimately manipulate the outcomes by wiring PR people, private investigators, and lobbyists.

The beautiful thing is having these digital pirates writing a manifesto to fight at this level. Redditors said: no more. And they push some hedge funds to a corner, putting them on their knees.

Though, Robinhood did shut down the trades and made it impossible for the operation to go all the way.

We are yet to understand who turned off the button. Who is behind this shameful market manipulation?

Ironically, a company called Robinhood closed the trades that were taking money from the rich to give to the “poor.”

We’ll be here to watch the next episodes.

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